China and the World of Business • China Business and the World

If nothing else, Rebecca MacKinnon has done a superlative job in pulling together into a single volume a treatment of the issue of Internet censorship in China as allegedly assisted by major U.S. companies, specifically Yahoo!, Microsoft, Google, and Skype. And for that, all of us should be grateful, because it provides us all with an opportunity to evaluate the position taken by activists working to change the behavior of these companies.

If for no other reason, this is a work that must be read and considered by everyone with an interest in the issues. Ms. MacKinnon is never bashful about stating her position or that of the publisher of the report, and there is no attempt to balance the discussion, but frankly I wouldn’t expect that. This is an advocacy document, not a piece of journalism, and it’s a damned good piece of advocacy.

To her credit, the report is a good read, and she articulates the positions more clearly than most have in the past. Frankly, I’m in general agreement with part of her premise – that there is more companies can and should be doing about this issue. After that, however, I’m afraid we part ways.

I have two major issues with the report that I think draw from its credibility and need to be addressed.

Simple Recommendations. Or, Not…

First is the contention made in the executive summary that:

“Human Rights Watch does not believe that the choice for companies is to either continue current practices or to leave China. Rather, we believe companies can and should make ethical choices about what specific products and services they will provide to the Chinese people––and the manner in which they are provided––without playing a pro-active role in censorship or collaborating in repression.”

In the cases of none of the four companies singled out in the report are specific recommendations made about which “specific products and services” should or should not be offered. What is provided at the end of the report is a series of seven recommendations to Internet companies operating in China, which boil down to:

1. Lobby the Chinese government to end censorship of the Internet. (See my next point below)

2. Refuse to participate in or facilitate infringements of the right to free expression, information, privacy, association, or internationally recognized human rights.

3. Never turn over personal user information if it could be used to prosecute a user. To ensure this happens, pull your servers with this data out of China.

4. Never censor any material unless required to do so in writing. Stop any proactive effort immediately.

5. Use all legal means to resist demands for censorship.

6. Document all censorship cases

7. Encrypt all email.

All of which sounds perfectly reasonable. What never happens in the course of the report is an analysis of whether or not it is possible to follow these practices and be allowed to operate in China. With all of the resources available to her, Ms. MacKinnon and her assistants never take the time to analyze with the kind of microscope an investment analyst would use is whether or not it is actually possible for Microsoft, Google, Yahoo! and Skype to do business in China under these requirements.

So We Lose a Few Internet Companies. We Have More.

“The display of politically objectionable content can result in reprimands to company management and employees from the MII, the State Council Information Office, the Communist Party’s Propaganda Department, and/or various state security organs, accompanied by warnings that insufficient controls will result in revocation of the company’s license.”

A somewhat knowledgeable reader can see the issue quite clearly – HRW requires that Internet companies refuse to “participate in or facilitate” infringements on free speech. And yet the report itself acknowledges that this kind of behavior could result in the revocation of a business license.

The question, of course, is whether the government would actually shut down these companies. Unfortunately the only way to test that is to have one or more companies step up and actually operate according to HRW’s recommendations. Since nobody wants to be the sacrificial chicken, Ms. MacKinnon proposes the modern equivalent of Russia’s political kommissars standing behind ranks of soldiers ordered into battle with orders to shoot if they try to retreat. She proposes legislation to force companies to challenge the will of the Chinese government.

(Worse, she suggests that U.S. companies would only be able to hand over user data to the Chinese government in cases determined acceptable by the U.S. Department of Justice. Under no circumstances would the Chinese government find this acceptable – it is redolent of the sort of extra-territoriality provisions forced on the Chinese during the period of unequal treaties and would invite an unequivocal response.)

Here is the question: how long would any Internet company, Chinese or foreign, be allowed to operate in China if it encrypted all email, refused to turn over personal information, moved its servers offshore, and demanded a writ each time it had to block a site or filter a word?

Does anyone with experience running a real business in the PRC, Chinese or foreign, doubt that taking such actions would be perceived by the Chinese government as the electronic equivalent of aiding, abetting, and harboring criminals? Is there any question that such actions would likely irritate some fairly senior people in government? Because in a land where rule of law is in its infancy, it would not require a court order to shut the doors of even the largest Internet company. All it would take is for a small number of well-placed regulators or police officials to lose their patience with a company and the axe would fall.

Something, again, that Ms. MacKinnon does not deny. She merely implies “HRW believes” it to be possible to act according to their requirements and still operate in China.

Fair enough. I “believe” she and HRW are wrong. And nether of us will be proven right or wrong until somebody does it. Any volunteers?

Moving the Immovable

My second objection to the report is the document’s implicit conviction that if U.S. companies make a principled stand, somehow they will change the nature of the Chinese government. From the recommendations:

“Lobby and attempt to convince the Chinese government and its officials to end political censorship of the Internet.”

Perhaps it is something in our psyche as Americans that believes that we can change anything if we work hard enough. I was raised to believe that this is an admirable trait. I have come to realize that there is a fine line between conviction and hubris.

With all of the government relations activity that companies engage in, the single most important aspect of that activity is developing an understanding of the broader policy agenda. Despite the misperception that MNC public affairs staffs, agencies, and industry associations actually help form policy in China (suggesting that Beijing operates the same way Capitol Hill does,) the reality is quite different. The only occasions on which companies are able to influence policy is when they are able to align themselves with or help direct politically powerful local interests in their lobbying efforts.

Despite the considerable aggregate value of foreign investment in China, the marginal value of any one company to the nation’s future in 2006 is in decline, and its political power with it. No longer do the nations leaders spend considerable parts of their schedules meeting with CEOs. The nation is awash in foreign cash. It boasts an economy that is growing beyond the most optimistic projections of its reformers. And it is coming to grips with a sobering reality – it has arrived at this place by selling off its best assets, it has created powerful competitors for its own nascent companies, and it still faces intractable economic issues.

Against such a background, the traditional levers wielded by foreign firms in their relationship with the government – the carrot of more investment, greater employment, and technology transfer vs. the stick of taking it all to India or Southeast Asia – are proving too short to move policy. What is worse, the element within government that sees foreigners as increasingly unwelcome interlopers and opportunists is growing. While it is unlikely that such sentiment will spill over into an outburst of anti-neocolonialism, it means that until rule of law is firmly established in China, companies operate in the PRC on the good graces of the government, and whatever levers remain to companies are used sparingly and in the interest of survival.

Can Companies Incite Social Change? Do We Even Want Them To?

This is by no means an issue unique to China or to this moment in history. In his book Empires of Profit: Commerce, Conquest, and Corporate Responsibility, Daniel Litvin debunks the myth that “Multinationals….ruthlessly [manipulate] governments and entire countries in the single-minded quest for profits.”

The myth dies hard, given that it is one of the Great Beliefs of our generation. But in a well-researched, carefully documented analysis that touches on ten cases, Litvin makes a cogent case that corporate influence even in the most corrupt of governance is more illusory than real, a misperception best banished from either NGO analysis or corporate strategy to someplace where it can do some good – pulp fiction.

Litvin’s primary conclusion is that compelling companies to become instruments of social change in the countries in which they operate vastly overestimates the abilities of these companies to bring about change. Social change is not brought about by brute force, whether it is the arms and armaments of the United States armed forces, the petrodollars of Shell Nigeria, or the vast media empire and soft power of News Corporation.

If China must change its ways in censorship, leaving it to the companies would be at best ineffectual, and at worst precipitate unintended consequences that would redound to the detriment of all – conceivably including a backlash against any foreigners and the Internet as a whole.

The burden of proof, as it were, appears now to lie with Ms. MacKinnon and HRW. Before embarking on a campaign to compel companies to change their ways, she is at least obliged to proffer some level of proof that the effort (and likely significant attendant commercial costs) have some chance for success.

To do any less would be disingenuous, as at present in the historical record as well as in the minds of the well-intentioned leaders and shareholders of the four companies she discusses, the likely end result of following her recommendations would be to force U.S. Internet companies out of China. I will give her the benefit of the doubt and assume that this is not her end goal.

Alternative Recommendations

It would be disingenuous of me to conclude without offering up my own solution to the situation. As such, I offer my own preliminary set of recommendations.

I. Companies

A. I agree that every company should operate under a clear code of conduct – what I dispute is a universal code. While there must be common values that underlie all codes of conduct, any code of conduct must be specific to its business, reflecting the fact that every business is unique and each faces its own unique ethical challenges and traps.

B. Companies need to be absolutely transparent with all of their audiences about the ethical challenges they face in China, and should be upfront about how they plan on addressing them. This means being upfront with investors, customers, regulators, and the community at large. At the same time, a company is obliged to be honest about the nature of the challenges it faces in China so that all of its publics are clear about what the company cannot change, what it can, and what it would cost the company to make those changes.

C. Seek coalitions with Chinese companies and entities who for their own reasons share the goals of limiting censorship.

II. Investors – Investors are the most critical force to guide company behavior. Investment in a firm doing business in China cannot be passive – it must be active and all of the hard questions need to be asked. If a company does not behave according to its own code of ethics, an investor is obliged to do all in his power, up to and including divestiture – to convince a company to act according to its own broader interests.

III. Activists and NGOs – Add capable business people to teams developing recommendations to companies to ensure that recommended courses of action are commercially practical as well as ethically correct.

IV. Foundations and Think Tanks – Study ways for the full range of groups and entities to build comfort among policy makers in China with the idea of a free and open Internet.

V. Users, including users in China – Make it clear to the company exactly how much the company’s policies really affect you.

VI. Governments – Provide companies with every opportunity to govern themselves in these matters, stepping in with legislation only when self-governance has failed. When stepping in, ensure that the companies that have made a good faith effort are not penalized along with those who have not.

VII. Business Associations – Provide companies with assistance in establishing codes of conduct, and in supporting the development of independent bodies to assess corporate behavior and compliance.

VIII. In addition, there are recommendations in the HRW report that are worth following, so.

A. Investors should press for ethical company practices and respect for users’ human rights, and should ensure that the company is doing all that is practical to ensure this.

B. Investors should press for a code of conduct and for companies to comply to it.

C. International organizations should study – and monitor – the ways in which non-transparent censorship in China contributes to the lack of a level business playing field and the extent to which censorship should be considered a barrier to trade.

D. Activists should work in concert with socially responsible businesses to develop technologies that will maximize privacy, ensure anonymity, and enable Internet users around the globe to circumvent Internet censorship, filtering, and blocking.

E. NGOs should conduct independent research and documentation of the ways in which companies are or are not complying with legislation and/or codes of conduct.

F. Foundations and NGOs should provide clearing houses of information through which users can better inform themselves about the ways in which the products and services they use may be limiting their universally recognized right to free speech and privacy

The Last Word

Creating a free Internet in China will not happen overnight, and in the end will not be driven by forces from outside of China. Foreigners have but an opportunistic, supporting role to play in the process, a process that is yet unfolding as the domestic news media becomes more assertive in its relationship with the government.

But the first indication that the drive to a free and open Internet is driven by forces outside of China will throw the issue into the laps of the state security apparatus, an event that will destroy the progress made to this point and thrust us back into the dark ages of the early 1990s.

Ms. MacKinnon and HRW should be commended on their report for giving their point of view an articulate outlet, and for keeping this issue on the corporate agenda. Now that they have done so, it is time for the debate over solutions to begin.